High-flying “story stocks” hit air pockets as credit finally tightens

“Nobody could ever have seen this coming” is the normal comment after sudden share price falls.  And its been earning its money over the past week as “suddenly” share prices of some of the major “story stocks” on the US market have hit air pockets, as the chart shows:

  • Facebook was the biggest “surprise”, falling 20% on Thursday to lose $120bn in value
  • Twitter was another “surprise”, falling 21% on Friday to lose $7bn 
  • Netflix has also lost 15% over the past 16 days, losing $27bn
  • Tesla has lost 20% over the past 6 weeks, losing $13bn

These are quite major falls for stocks which were supposed to be unstoppable in terms of their market advances.

Of course, their supporters could say it was just a healthy correction and a “buying opportunity”.  And they might add that so far, other “story stocks” such as Alphabet, Apple and Amazon are still doing well.  But others might say a paradigm shift is underway, and these sudden shocks are just the early warning that the central banks’ Quantitative Easing bubble is finally starting to burst.

They might have a point, looking at the second set of charts:

  • Twitter stopped being a major growth story as long ago as 2015, since when its user growth has been relatively slow, even going negative in some quarters
  • Facebook stopped showing major growth in active users 18 months ago – and in 2018, it has been flat in N America and losing subscribers in Europe, whilst Asia and the Rest of the World are also heading downwards
  • Tesla, of course, has been a serial disappointment.  Its founder, Elon Musk, was brutally honest when founding the company in 2003, saying it had a 10% chance of success.  Since then, it has mostly failed to meet its production targets.  It was supposed to be making 5000 Tesla 3 cars a week by the end of last year, but according to Bloomberg’s Model 3 tracker, it is currently producing only 2825/week.  Around 0.5 million buyers have paid their $1k deposits and are still waiting for their car – and Tesla needs their cash if its not to run out of money
  • Netflix is another “story stock” now seeing a downturn in subscriber growth.  Yet at its peak it had a market value of $181bn, with net income for this quarter forecast by the company at just $307m.  Like Tesla, it was valued at a higher value than comparable businesses such as Disney, which have had solid earnings streams for decades.

The common factor with all 4 stocks is that they have a great “narrative” or “story”.  Elon Musk has held investors spellbound whilst he told them of unparalleled riches to come from his innovation.  This seemed to be the same with Facebook until the furore arose over the data user scandal with  Cambridge Analytica.  Twitter and Netflix have also had a great “story”, which overcame the need to show real earnings even after years of investment.

THE LIQUIDITY BUBBLES ARE STARTING TO BURST AS CENTRAL BANK STIMULUS SLOWS
In other words, reality seems to be starting to intrude on the “story”, just as it did at the end of the dot-com bubble in 2000, and the US subprime bubble in 2008.  The key, then as now, is the end of the stimulus policies that created the bubbles, as the 3rd set of charts shows:

  • Slowly but surely, the US Federal Reserve is finally raising interest rates back to more normal levels
  • And more importantly, China’s shadow bank lending is declining – H1 was down by $468bn versus 2017

Even the European Central Bank and the Bank of Japan have signalled they might finally be about to cut back on the combined $5.75tn of lending, often at negative rates, that they pumped into the markets between 2015 – March 2018.

The issue is simple. All bubbles need more and more air to be pumped into them to keep growing. Once the air stops being added, they start to burst. And for the moment, at least, Facebook, Twitter, Netflix and Tesla are all acting as the proverbial canary in the coal mine, warning that the great $33tn Quantitative Easing bubble may be starting to burst.

The post High-flying “story stocks” hit air pockets as credit finally tightens appeared first on Chemicals & The Economy.

Global auto industry enters “peak car” era

All autos Apr14Q1 saw record global auto sales volumes, as the chart above shows:

  • US and EU manufacturers cut prices and offered great financing deals to boost sales
  • Chinese buyers raced to beat new quota restrictions on the main cities
  • Japanese consumers brought forward purchases ahead of April’s sales tax increase
  • Only India disappointed of the 5 major markets, with sales continuing to slip as the economy slows
  • Overall, 2014 sales at 14m (red square) were up 8% versus 2013 (green line)

This may well mark not only a temporary peak, but also an absolute peak, however.  US and EU sales should continue to be supported by major incentives in Q2.  But China will probably slow as quotas and credit tighten, whilst Indian manufacturers are cutting 200k jobs as the auto sales slump continues.

Japan sales are forecast to fall 15% due to the sales tax, and will clearly continue to decline.  1 in 4 of its population is now over the age of 65, and there are almost as many people aged 75+ as there are children aged under 14.  Equally important is that the working age population continues to hit new lows each year as the overall population declines.

WORLD NOW REACHING ‘PEAK CAR’ MOMENT
More important for the long-term, as Bloomberg report, is the fact that the world is reaching its “peak car” moment.  As the blog has noted before, the average car is only driven for 1 hour a day.  Car sharing, as argued by BMW and Mercedes, is clearly a far more affordable business model for cities in the future, as it operates on a ‘pay to use’ basis.

The key issue is that cars are only a mechanism for going from one place to another for most people.  Only a minority of people actually like owning and driving them.  So the need that will be filled in the future will be for ‘mobility’, not car-ownership.  This has major implications for anyone supplying the car industry, of course, as we describe in chapter 9 of Boom, Gloom and the New Normal.

The arguments against further increases in car volumes speak for themselves:

  • Each vehicle in a car-sharing fleet replaces 32 new car sales, according to Alix Partners
  • Even the current level of car-sharing has reduced total US sales by 500k
  • Self-driving cars such as Google’s offer greatly improved journey times, if they can operate safely
  • Younger people no longer see car ownership as part of growing up, and prefer to live in walking neighbourhoods
  • Gridlock and pollution make the practicalities of more cars in towns impossible

Of course, it is always hard to accept that major change is inevitable.  As Bloomberg report, the world’s first urban planning conference in 1898 spent its time worrying that an inevitable rise in the use of horse-drawn vehicles would lead to manure levels reaching 3rd-storey windows in New York.

As General Casey argued recently, leaders need to learn to “see around corners“.   They must resist the wishful thinking that says things will never change.  The coming decline in global car sales will be a good example of his message coming true.